The Coming Economic Collapse Revisited

I
first published this essay in the Summer of 2009. At that time the whole
world believed Obama’s Stimulus Program was working at that the stupid
greenshoot recovery was underway. Today I’d like to reprint this essay because
the same structural issues that plagued the US in 2009 are still valid and
because this piece proved, two years ahead of time, that the US would suffer a
massive economic collapse.

The seeds of today’s
crisis were first sown in 1971 when the US formally opened up trade with China.
In an effort to boost profits, large scale US manufacturers and other
multinational firms began outsourcing their manufacturing jobs to the People’s
Republic soon after.

When other industries
realized the kind of money that can be saved by sending work overseas, they
soon followed suit. Outsourcing moved up the corporate food chain until even
R&D jobs and other high-level, high-skill set jobs were shifted to Asia.
This, of course, diminished the number of these positions in the US. Thus began
three major trends:

The US’s economic shift from
manufacturing to services (mainly financial)

The massive drop in US incomes

The beginning of the debt bubble

Nothing illustrates the
first point like the rise of the financials sector. From 1970 until
2003, financials’ market capitalizations as a percentage of the S&P 500
rose from less than 5% to 22%. Over the
same period, financials’ earnings as a percentage of the S&P 500’s total
earnings rose from less than 10% to 31%.

Put another way, by 2007 one in
every three dollars of corporate profits came from the financial sector.  Meanwhile, China was experiencing an
unprecedented level of growth thanks to our renewed trade: Chinese per-capita income doubled from 1978 to
1987 and again from 1987 to 1996.

Now, fewer jobs in the US
means lower US incomes. Going by the Federal government’s official (inaccurate)
data, weekly US incomes peaked in October 1972 and have since fallen 15%. Of
course, these numbers are based on official inflation data which is horribly
under-stated. According to John Williams of www.shadowstats.com,
if you were to go by real inflationary data, US incomes have fallen more like 40%.

This fact stares us in the
face everyday, though no one really notices it. In the early ‘70s, typically
one parent worked and the other stayed home. Today, BOTH parents work and most
Americans are barely getting by.

The reason we didn’t
notice the dramatic drop in quality of life in the US before is because of one
thing:

Credit.

Credit cards had been in use since the ‘50s, but they had yet to catch
on, largely because banks couldn’t make obscene profits from them (the interest
rates they could charge were limited on a state-by-state basis).

Then, in 1978, the Supreme Court passed a law stating that banks could
charge their cardholders any rate
allowed in the bank's home state. With this ruling, credit cards suddenly
had the potential to become a major profit center for banks. Major banks immediately
shifted their credit card operations to states where there were no limits on interest rates (Delaware and South Dakota).  

Credit creates the illusion of wealth (or in the US’s case for the
last 30 years, the illusion of maintaining the same standard of living) because
you’re able to spend more than you make or spend money without paying upfront.
Americans, earning less and facing rising costs of living, gradually began
their descent into indebtedness: between 1980 and 1990, credit card spending average household credit card balances
quadrupled.

In this manner, the average American didn’t notice that his or her
quality of life was deteriorating at a rate of about 2-3% a year. Similarly, he
or she didn’t notice that more and more jobs (of greater and greater technical
expertise) were shifting overseas. 

And thus began the epic shift in American wealth to Wall Street (the
rise in the financial industry) and China (the producer of cheap goods we had
to buy due to the drop in incomes).

Because of this,
incomes fell in the US forcing consumers to start using credit to maintain
their living standards. The same practice occurred in the public sector as
well. Adjusted for inflation, gross tax receipts have only risen 40% in the
last 39 years. However, over the same time period, total government spending
increased 2,600%!!!

To fund this
insanity, the US issued debt in the form of Treasuries. Foreign governments
(most notably China) which were generally getting richer selling us stuff
loaded up. The whole scheme is similar to buying a toy from the store, then
having the store lend you money to buy another toy… ad infinitum: hardly a
sensible long-term plan for financial solvency.

Now, everyone knows
we run deficits. But not everyone knows that the deficits we publish are
unbelievably understated. Corporations, in order to qualify for generally
accepted accounting principles (GAAP) have to count their pension and
healthcare expenses for retirees.

Uncle Sam doesn’t.

John Williams of www.shadowstats.com notes that official
US deficit statistics do NOT include net present value of unfunded social
security OR Medicare expenses. A lot of folks have made a big deal about the US
running a $1 trillion deficit this year. Well, if you included the net value of
those unfunded Social Security and Medicare expenses we cleared a $1 trillion deficit in 2007, a $5 TRILLION deficit in 2008
and are on course to clear a $9 TRILLION deficit this year.

To give you an idea
of how big a problem these deficits are, consider that the US government could
tax its citizens 100% of their
earnings and NOT have a balanced budget. 

In light of these
issues, the government’s $787 billion stimulus package doesn’t exactly breed
confidence in an economic turnaround. Incomes have lagged inflation in this
country for 30+ years. Creating a bunch of temporary positions related to
construction and the like is NOT going to alter this in any significant way.

Moreover, most of
the job growth in the last 10 years has come from Bubbles: two out of five jobs
created between 2002 and 2007 came from the housing industry. The irony here,
of course, is that the Stimulus Plan is merely following this trend, creating
jobs from our latest (relatively unreported) Bubble: the bubble in government
spending and employment.

Bottomline: the US
needs to create sustained job growth involving skilled professionals with high
wage earning potential, NOT more guys laying concrete. We need fundamental
structural changes to the US economy, NOT temporary positions resulting from
one-time government projects.

And with a $9
trillion deficit in the works, $787 billion doesn’t really mean much in terms
of increased tax receipts. Also, and this is bit of a personal aside, it’s hard
to believe that throwing $787 billion towards creating jobs really shifts our
economy away from financial services when we’ve thrown $2 trillion+ towards
Wall Street and the banks (via direct loans and lending windows).

The US has a MAJOR debt
problem. Including future social security and Medicare expenses we owe $65
TRILLION. Because we live in a world in which the words, “billion” get thrown
around with too much ease, I’d like to put that number into perspective.

Let’s say you have a stack
of $1,000 bills. $1 million would be a stack eight inches high. $1 billion
would be a stack 800 feet high (think the Washington Monument). And $1 trillion
would be a stack 142 miles high. Total US debt, if laid on its side, would be a
stack of $1,000 stretching more than 1/3
of the way around the earth.

Ok, so where is the US
economy REALLY at right now?

Year over year real
employment, real industrial orders, real housing starts, and real retail sales
are all posting their largest drops since the production shutdown following
WWII. Put another way, the last time the US economy fell this hard this fast, we were intentionally shutting down the
monster than was the US war machine in WWII.

This is no recession. We are
already on our way to a Depression (a GDP contraction of 10%) possibly even
another Great Depression. One in nine Americans are currently receiving food
stamps. Real unemployment (without birth/death seasonal nonsense and all the
other Federal gimmicks) stands at 20%.

So I don’t buy the “green
shoots” theory at all. Having things get horrendous at a slightly slower rate
is NOT a sign of a recovery. Green shoots can pop up anywhere including the
asphalt in the parking lot outside my office. That doesn’t mean the parking lot
is about to become a lush meadow.

No, the US is heading for a
really, really rough time. The US monetary base has doubled in the last year.
We owe $65 trillion in liabilities. The US government could tax every company
and every American 100% of their annual incomes AND NOT PAY THIS OFF. The Feds
will have to inflate this mess away. And they’ve got a master money printer Ben
Bernanke overseeing this situation.

Now, I cannot foretell
precisely how this will all play out. Typically when a bubble bursts it takes
10+ years, possibly an entire generation, before the assets that participated
in the Bubble return to new highs (sometimes they NEVER do).

Now, we just got off the
biggest credit/ debt bubble in the world’s history. I’m talking about 30+ years
of spending money we don’t have culminating in a period in which Americans were
speculating in the single largest asset they ever purchase (a house) without
putting a cent of their own money at risk (0% down NINA loans).

We also saw a bubble in
stocks, Treasuries, and most every other asset you can invest in. So the idea
that we can recover from this in a couple of years seems over enthusiastic to
say the least.

Remember, Japan experienced
a similar Bubble (though they had higher savings than we did) and “lost” a
decade of economic growth. It’s worth noting that Japan WAS NOT an Empire like
the US.  Japan did not have with
bases in 170 countries, a world reserve currency, and a crippled job market
(history rhymes, it does not repeat).

So in terms of the real US
economy, I don’t foresee a recovery anytime soon. The stock market may soar
thanks to the Fed’s money printing, but a jump in financial speculation is NOT
an economic recovery. If the S&P 500 goes to 20,000, but we’re drinking
$1,500 beer and wiping ourselves with $100 bills, we haven’t gotten richer
(nevermind the fact that an S&P 500 of 20,000 DOESN’T create jobs).

So how will we know when a
bottom is in and the economy will recover? I’ve postulated a few signs (some
humorous, others not so pleasant). Bear in mind, much of this in tongue in
cheek. But like all sarcasm, there’s a grain of truth.

We will bottom WHEN:

CNBC and Bloomberg
start firing anchors and cutting their coverage time by hours, not minutes.

Maria Bartiromo and Jim
Cramer start telling investors to short the market with all they’ve got.

Questions like “do you think we’re heading for a recovery”
result in the questioner getting punched in the face or ignored like a loony
tune.

People HATE stocks and stock
ownership has plummeted back to one in ten Americans (the pre-401(k) levels).

Investing is no longer a
hobby and people fight tooth and nail to retain their nest egg (honestly what
the hell is “play” or “speculative” money?)

The number of mutual funds
has fallen by at least half (why are we paying fees for people who can’t beat
the market?).

People no longer want to get
an MBA to become a broker or a financial advisor.

Our economy is based on
“making something,” not “offering advice.”

Books about Warren Buffett
no longer comprise an entire publishing industry (seriously, Amazon lists
5,000+ books on him).

The Richest 500 people in
the world are no longer all billionaires (never happened before in history…
how’s that for concentration of wealth?)

Then… we will have probably
hit bottom.

Good Investing!

Graham Summers

PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.

I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.

PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.

Comments

[Doug Wilder]

Find another way to advertise dude; this is getting old and its sad.

[Milestones]

Geez Gold, you sound like a sales pamplet for Camp Orizaba! Wow, happy days are here again! 

Hope ya have a sense of humor.

Milestones

[Gold 36000]

I do have a sense of humor.  Maybe it sounds corny but we can make the happy days happen.  It doesn't require a lot of money.  People got by with a lot less a hundred years ago.

How much is a pack of hot dogs, relish, mustard, and buns?  Add in a couple of cases of cheap beer and some party chicks and you got yourself a good time.  Play some water volleyball in the apartment pool and watch the girls jiggle.

That is the good life!

[Gold 36000]

By the way I do think Graham Summers is on to something with his call of what the bottom will look like.  I'm not denigrating investment.  I think he has some good advice, and I enjoy reading his columns, but let's not spend all our time worrying.

[RockyRacoon]

Since everything is/was well above the median, reverting to a 75% level would be a best case scenario.  I'm fine with that.  Meaning I'd be back to perhaps the level of life style in 1995?  No prob.   Reverting to the mean in actuality could be a 50% retracement.   Let housing declines be your guide.   I lived as a kid in a 3 room shack in a pasture with an outhouse and wood stove, circa the 1950s.  Bring it on.

[bigkahuna]

I agree. I think we are looking at a fifty percent overnight devaluation in the USD a la Venezuela. I am not sure when it will happen, but to avoid a collapse-it has to happen. My guess is when the bernanke decides to raise rates and after the USD is no longer the dominant global international transaction currency, the USD will be devalued. There will be no price controls, and get ready for financial institutions to call in and "renegotiate" all debts. Nobody gets out of this clean-except the bernanke and his people of course.

Some form of this has to occur in order to avert a mad max/zombie-land scenario.

[RockyRacoon]

Re all comments above, anything is possible, and preferable to what we have now.

That old saying holds true:  Debt that cannot be repaid won't be.

This report will shock even the most jaded amongst us:

http://freemanglobal.com/uploads/Economic_Warfare_Risks_and_Responses.pdf

CONCLUSIONS
There is no question that the collapse of Lehman Brothers triggered the economic heart attack that began on or around 9/11/2008. That crisis has led to additional economic weakness and may have turned a bad recession into near depression.
While the economy was vulnerable due to substantial leverage and regulatory holes, there is substantial justification to consider the hypothesis that a concerted economic attack may have taken place, targeted initially against U.S. financial institutions. In fact, this theory is supported by experts including hedge fund managers, regulators, former regulators, academics, and many others. There is also some unusual trading activity that appears suspicious at a minimum, and may in fact provide the forensic proof upon further investigation.
For those who would argue that such a scheme could not go undetected, or that the FBI, SEC, spy agencies, or regulators would have noticed, the Congressional testimony of Harry Markopoulos, CFA regarding Bernie Madoff is very instructive. For more than a decade, there were specific and direct warnings placed before the primary regulatory bodies and law enforcement agencies. Despite this, Madoff was allowed access at the highest levels and even to create public policy. A serious lack of transparency and a ?hands off? approach to the markets allowed what is alleged to be a fraud that cost its victims nearly $50 billion.146
The hypothesis discussed in this paper suggests the very real possibility that financial terrorism may have cost the global economy as much as $50 trillion, roughly 1000 times greater than Bernie Madoff’s fund and equal to nearly four years of American productive output.
Potential suspects include the vast and growing Sovereign Wealth Funds, supported by substantial excess oil revenues. While a number of experts have attempted to dismiss out of hand any fears of nefarious activity by Sovereign Funds, this ignores the reality that government owned funds are or will be political in nature over time. As a case in point, Venezuela‘s acquisition of CITGO that began in 1986 and was completed in 1990 was considered very benign. Since then, however, Hugo Chavez rose to power with an agenda to harm the United States and destroy capitalism. Imagine the impact if CITGO were more strategically significant. The point being that even currently friendly sovereign funds could over time become unfriendly. This is especially true in nations with strong radical jihad movements.
Even as the stock market appears to have stabilized somewhat, there is a new and increasing risk of financial attack. This attack actually poses a greater risk to American well-being than either the oil price ramp or the collapse in stock prices. The potential damage to U.S. sovereignty is unfortunately quite high and must be addressed almost immediately.
Economic Warfare: Risks and Responses
Page - 75 -
POLICY RECOMMENDATIONS
Given the critical nature of the hypothesis of economic war/financial terrorism outlined in this paper, a plausible state of emergency may well exist. The preponderance of evidence that cannot be easily dismissed demands a thorough and immediate study be commenced. Given the seriousness of the concerns along with the apparent influence of outside forces on our bureaucratic government, it is strongly recommended that the immediate review be undertaken by private sector experts outside of traditional Wall Street influence.
A number of immediate additional policy recommendations emerge from this study. Some of these are currently under consideration. Others should be immediately addressed.
Those under consideration that should be strongly considered and implemented in some reasonable format:
1. Require transparency for hedge funds that will show who the clients are and provide access to all trading records on a trail. Implement anti-money laundering laws.
2. Regulation of CDS with limits on the amount that can be ?insured? relative to the nominal debt. Limit use to those with an insurable interest.
3. Eliminate naked short selling by mandating delivery of shares. Eliminate broad exceptions.
4. Reinstate the uptick rule in some enforceable format.
5. Eliminate the Enron loophole in oil trading.
6. Mandate U.S. based regulation over critical trading platforms (including the ICE oil trading).
7. Use international pressure to force greater Sovereign Wealth Fund transparency when accessing U.S. capital markets.
8. Streamline regulatory authority.
The challenge will be to not destroy efficiency via regulation but instead to focus efforts to track down the perpetrators and properly respond. Ignoring the likelihood of this very real threat ensures a catastrophic event. Therefore, in addition to the above, it is deemed essential also to do the following:
1. Recognize that protecting the American economy and industrial capability is a top defense priority that should be properly funded and supported. While non-combat in nature, economic warfare is essential to protecting the American way of life.
2. Prepare a task force to thoroughly research the hypothesis of economic warfare described herein from an economic defense perspective.
3. Create a specialized threat finance unit to develop and implement appropriate countermeasures to emerging threats in coordination
Economic Warfare: Risks and Responses
Page - 76 -
with key defense, intelligence, and financial agencies, preparing targeted global responses as needed.
4. Hiring and training of experts and consultants to support economic/financial threat recognition and awareness in various departments with redundancy.
5. Recognize that many Wall Street and DC-based experts may have inherent conflicts of interest due to connections with hedge funds or others that may have been complicit in market attacks. Likewise, existing regulators who long overlooked problems may not be the best candidates for addressing the problems. Finally, traditional defense and intelligence agencies may not have the economic expertise to analyze or address the complexities of this situation. Therefore, due to the magnitude and seriousness of the risks, these efforts are best served outside traditional agencies and departments. [This follows the historical precedent from the inception of intelligence agencies in the late 1930s based on concerns of Nazi infiltration at the initial stages of World War II.]

[bigkahuna]

Thanks Rocky. I believe that if a soverign fund or several of them did this--they certainly had inside help. We all know what happens to incriminating information when we have an inside job. It makes sense no?

[living on the edge]

Rocky,

I agree with you, I don't buy this 25% retracement crap. In fact the scenario he described above as a bottom indicates at least 50% or more of a fall. I also don't see a mad max scenario but there will be riots and unrest. Perhaps a regionalization of the states could occur as the federal government is seen for what it really is and is tendered to irrelevancy.

[Bicycle Repairman]

The USA did exist in the 1950s and 1960s.  Families did live in 3 bedroom ranches with one car and one TV and were happy.  It really did happen.

[dark pools of soros]

yeah but the media back then didn't show you everything behind the curtain like it does now around the globe.. the old Lifestyles of the Rich and Famous was more like a royalty showcase since no one you knew had life much better than you did,  but now you see how your future is bankrupt and can name everyone of these jackasses behind the swindle

[f16hoser]

Can you freeze beer? I hate skunky beer........

[10kby2k]

try it and freeze some cola , too

[Gold 36000]

On average if the dollar loses its reserve status then our standard of living is estimated to be reduced twenty five percent.  Of course individual results will vary.

I don't know why everyone is so gloomy.  An average of a twenty five percent reduction in standard of living is not that bad.  We will drive junk cars, drink generic beer, eat less meat (and be healthier for it).  We will eat out less.  We will take more local vacations.  We may walk and bicycle more.

I don't see the big deal.  The genteel poverty of my college years were the best years of my life.  There are lots of ways to enjoy oneself that don't require money, but they do require being sociable and socially connected to a fun group.  Instead of going out to happy hour we can grill some hotdogs at home and invite a bunch of people over for cheap beer.

We worry too much about money!

[snowball777]

And if that 'average' consists of 60% losing 50%, 30% losing 40%, 19% losing 10%, and 1% gaining 900%?

You don't worry enough about your own well-being, it seems.

[DavidPierre]

You seem to be a young person with clear vision..... (except for the cheap beer.*)

Less is More!

*Support your local micro-brewers...not that Bud-stupider swill or Cuurs crap.

[Gold 36000]

Actually I am in the gray zone between baby boom and generation X.  A no man's land.  I would prefer to be claimed by generation X but they see me as old.  The baby boom sees me as young.  I'm a man without a generation.

[rcmullins]

I am kinda in that group with ya.  1969 baby.  And you are right, we worry way too much about money.  With five kids and a wife though, I am more concerned about it than those wild and wooly youthful days.  

[IslandMan]

If you were born in 1969 you are certainly Gen X.  I think Gold36000 is an early 60s baby, like me ; I know how he feels, too young to be a boomer, too old to be GenX.

[cbxer55]

61 here.

Heinekin Dark for this kid.

[dark pools of soros]

GenX is a nomadic breed - Boomers are more the pilgrimage types

[johnQpublic]

'66 here

and i'm not going back to drinking shit beer

top end tequila or death dammit...its why we have dogs instead of kids

[chumbawamba]

You come with no pre-conceived generational label.  You are free to define yourself.  Rejoice.

I am Chumbawamba.

[Misean]

It's not so bad. The five of us could organize a support group in a vacant mortgage lending building.

[DavidPierre]

I'm surfing on the front curl of the Boomer Wave and just hanging ten on the nose of my coffin. 

Here... have one on me....

http://www.okspring.com/pale-ale/

[Cpl Hicks]

You're a hoser, eh?

[dick cheneys ghost]

Saudi Arabia drafts 10,000 troops ahead of protests.......the kingdom is scared

http://nakedempire.wordpress.com/

[Cpl Hicks]

How well will things run when the 2 thousand Saudi princes put weapons into the hands of 10,000 Pakistani, Indonesian and Filipino drivers, gardeners and houseboys?

[snowball777]

The blood will run...oh...you meant the oil.

[CPL]

Freshly drafted troops...sigh...hopefully the shit doesn't hit the fan before they get to train them which end of the gun fires a bullet.

[DavidPierre]

"...three investments that have all already SOARED as a result of the Fed’s monetary policy..."

         Ag...Au...Pb !!!

"Our economy is based on “making something,” not “offering advice.”

Enuf old news already, son!

Dump the Pump!

[covert]

somehow America will recover.

http://covert2.wordpress.com

[egdeh orez]

At first, this Phoenix guy's article was kind of informative and cool... now, it just seems like infomercials to me.

[Doug Wilder]

None of this guy's prediction has ever come true to my knowledge and I've been following him the last two years.  At first he predicted the Euro would collapse.  It's at 1.38 and not a peep about the topic.  When it tanks to around 1.29, I'm sure a lot of "experts" would have a lot to say!

[Kayman]

Well... Doug

If our man Graham is going to be boiled in a pot beause he is  bent on hyperbole, then a few other ZH contributers would have to accompany him.

With repect to the Euro, timing, as always, is an issue.

Since no individual European country, bound to the Euro, can operate an independent monetary policy, and inflate away their debt (depreciate their currency like Bernanke can) then the question becomes "can Germany subsidize other Euro members debt" and will countries like Ireland remain slaves to debt?

The Euro is not the American flag.

[dark pools of soros]

i like the guy but he could help the 'recovery' by employing a proofreader